Lump sum vs car loan pay off

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Lump sum vs car loan pay off

Postby Streptococcus » Fri Jul 26, 2013 4:33 pm

I purchased a car 24 months ago with a 5 year loan:
Cost $24,525
Current balance $ 16,108
Interest rate 3.99%
Monthly payment $451
Interests paid to date ~$1700

Should I pay it off or lump sum invest it? Or maybe should I just refinance the loan?
I get a 20K lump sum bonus every august and february;
My efunds are covered (12 months)
I DCA invest every 30 days and until now, i have lump summed the bonuses every 6 months. But now I wonder if I should just pay off the car and remain with my mortgage as my only debt.
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Re: Lump sum vs car loan pay off

Postby StarbuxInvestor » Fri Jul 26, 2013 4:45 pm

I am not going to argue this is the most efficient investment choice but I would pay it off. My experience is that paying off a car saves you money in 2 ways. First, you save the interest. Second, if your car is paid off you usually wait longer before buying a new car. That said I am also a cash flow guy so I really like reducing outflow. In my life it has always been less debt better sleep.
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Re: Lump sum vs car loan pay off

Postby gvsucavie03 » Fri Jul 26, 2013 5:12 pm

StarbuxInvestor wrote:I am not going to argue this is the most efficient investment choice but I would pay it off. My experience is that paying off a car saves you money in 2 ways. First, you save the interest. Second, if your car is paid off you usually wait longer before buying a new car. That said I am also a cash flow guy so I really like reducing outflow. In my life it has always been less debt better sleep.


+1. You also aren't guaranteed to make any money on the lump sum (or even DCA for that matter) investing, but paying off the car does guarantee that you'll save that amount of interest.
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Re: Lump sum vs car loan pay off

Postby island » Fri Jul 26, 2013 5:45 pm

Agree I'd pay off the loan. Living as debt free as possible is the way to go.
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Re: Lump sum vs car loan pay off

Postby Default User BR » Fri Jul 26, 2013 6:53 pm

If I could get a PenFed 1.74% refi, that's the way I'd go.


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Re: Lump sum vs car loan pay off

Postby Default User BR » Fri Jul 26, 2013 6:54 pm

gvsucavie03 wrote:You also aren't guaranteed to make any money on the lump sum (or even DCA for that matter) investing, but paying off the car does guarantee that you'll save that amount of interest.

You could say the same thing about putting it in a CD. You can NEVER guarantee that risky investment will beat a risk-free one. But, so what?


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Re: Lump sum vs car loan pay off

Postby Streptococcus » Fri Jul 26, 2013 7:19 pm

Yep, I called penfed and I could refinance for 1.74% interest, which would lower my yearly interests to $272. But I was also thinking that if I pay the loan off, I'm basically taking a 4% gain in a 3 year investment (remaining loan time)
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Re: Lump sum vs car loan pay off

Postby rfburns » Fri Jul 26, 2013 7:19 pm

Pay off the car. That leaves about $4k to splurge on something worthwhile, i.e. vacation or paying down mortgage principal. Then get back what you were doing before. Just my two cents.
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Re: Lump sum vs car loan pay off

Postby thebogledude » Sat Jul 27, 2013 12:33 am

The rule of thumb is if you can make more investing the money than you would in paying the interest, then invest it.
Otherwise, pay off the loan.
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Re: Lump sum vs car loan pay off

Postby Caduceus » Sat Jul 27, 2013 12:43 am

I think this may also partly depend on how disciplined you are with cash flow issues. My vote would be to refinance to a 1.74% rate, but that's assuming that you would borrow at 1.74% to invest if you could (which is essentially what you would be doing).
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Re: Lump sum vs car loan pay off

Postby Default User BR » Sat Jul 27, 2013 1:36 am

thebogledude wrote:The rule of thumb is if you can make more investing the money than you would in paying the interest, then invest it.
Otherwise, pay off the loan.

That's not a great rule. After all, for most interest rates you CAN make more, given the right circumstances. The question is more of the reasonable expected return for the investment versus the loan payoff.


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Re: Lump sum vs car loan pay off

Postby thebogledude » Sat Jul 27, 2013 1:45 am

Default User BR wrote:The question is more of the reasonable expected return for the investment versus the loan payoff.

Brian


I'm not sure what you mean? The principal that you borrow vs. the principal that you invest remains the same. if you can make more investing than you would in paying the interest, why would you pay off the loan?
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Re: Lump sum vs car loan pay off

Postby Default User BR » Sun Jul 28, 2013 12:42 pm

thebogledude wrote:
Default User BR wrote:The question is more of the reasonable expected return for the investment versus the loan payoff.

I'm not sure what you mean? The principal that you borrow vs. the principal that you invest remains the same. if you can make more investing than you would in paying the interest, why would you pay off the loan?

You CAN make more investing than just about any interest rate. VTSMX is up over 20% YTD. Does that mean carrying a 15% loan would be a good strategy? Again, it's what a reasonable expected return for investing would be versus the loan. It can be a bit squishy, of course, but that's part of the uncertainty of investing.

Sometimes it's pretty clear. Last year I took a HEL at 1.99% tax-deductible. I could have, had I wanted, put it in my stable-value fund at work earning 2.32% (at the time) tax-deferred. I didn't, but instead invested to plan. Which brings risk, risk that might mean that I'll "lose"[1] money over the term of the loan. But to me, a reasonable expectation was better than the 1.4% or so actual interest rate on the loan. No-brainer to me.


1. You don't, of course, actually lose money on investments until you sell them (or they go to 0). What I'd really lose would be in opportunity cost if stocks dropped, as the money used to service the loan would instead be invested in lower-cost shares.

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Re: Lump sum vs car loan pay off

Postby StarbuxInvestor » Mon Jul 29, 2013 10:46 am

thebogledude wrote:
Default User BR wrote:The question is more of the reasonable expected return for the investment versus the loan payoff.

Brian


I'm not sure what you mean? The principal that you borrow vs. the principal that you invest remains the same. if you can make more investing than you would in paying the interest, why would you pay off the loan?


Well interest payments saved aren't taxed but cap gains are so that would narrows the difference. Also say you did this June 2007 and after all this is a short term loan 2 or 3 years versus a stock investment which should have 5 to 10 year horizon. So in June 2007 I put the money in the market instead of paying off a loan set to end say June 2009, how do I feel about that move? People need transportation and shelter, you can do what you want but to risk dramactically increasing the cost of those to me is something that should not be taken lightly. I know during the housing crisis and the stock market fall starting in 2007 I felt pretty smart having had made a lot of extra principal payments. I am just saying taking a balanced approach between debt elimination and investing to me just seems like one more very smart diversification move. One question to everyone I would pose is doesn't it seem leverage is virtually at the heart of all finicial crisis. Generally speaking it seems if a person isn't leveraged they have a much easier time riding downturns out than people who are leveraged. Just a thought.
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